Canadian credit card default rate at record level in Q2, Moody's says

TORONTO - More Canadians than ever are peering into their mailboxes with trepidation as they await the arrival of their monthly credit card bills, according to new data that could portend a less than merry Christmas for many consumers and retailers alike.

TORONTO - More Canadians than ever are peering into their mailboxes with trepidation as they await the arrival of their monthly credit card bills, according to new data that could portend a less than merry Christmas for many consumers and retailers alike.

Moody's Investors Service, the New York-based financial rating agency, says the amount of unpaid Canadian credit card debt written off by issuers rose nearly 60 per cent to record levels in the second quarter compared with the same period last year.

What's more, credit card delinquency rates - the number of accounts 30 days past due - rose 23 per cent in the April-June period versus last year.

"My opinion is that it's going to be a conservative Christmas," Laurie Campbell, executive director of the credit counselling agency Credit Canada, said in commenting on the report.

The not-for-profit agency, which counselled more than 60,000 people in 2008, has experienced a 22 per cent increase in new cases so far this year.

"What we are seeing here is definitely higher debt loads - but more frighteningly - the serious inability to pay this debt," Campbell said.

Because unemployment is expected to continue to rise in the coming months and personal bankruptcies are expected to remain at historically high levels well into 2010, she sees little improvement in the near future.

"I'm not an economist, but I don't think it takes an economist to recognize there will be very slow, flat growth this year because Canadians have to deal with the debt they're carrying before they can start spending in any real way," Campbell said.

Moody's said the so-called charge-off rate hit a new high of 4.8 per cent in the second quarter, a 57 per cent increase from 3.07 per cent for the second quarter last year.

"The intensity of the current recession has led to charge-offs that have exceeded previous cyclical highs by a relatively wide margin," states the quarterly Moody's Canadian Credit Card Index.

A charge off is when credit card balances are written off an uncollectable. An account has to be written off after 180 days of delinquency, but can happen sooner.

It's the tenth consecutive quarter of year-over-year increase in the index, "and sets a record high charge-off rate for the third consecutive quarter," Moody's said.

It said the June charge-off rate alone was 4.96 per cent, another record, and coincides with record levels of personal bankruptcies.

"Trends in the unemployment rate and credit card charge-offs are highly correlated. Both measures tend to lag the general economy," the report states.

Moody's is calling for unemployment in Canada to peak at 9.6 per cent in the second quarter of 2010, and for the charge off rate to also rise in the coming months, "though at a relatively slower pace than earlier in the year."

The delinquency rate was 2.82 per cent in the second quarter, up from 2.29 per cent a year ago.

However, Moody's pointed out that the second-quarter level dipped slightly from 2.9 per cent in the first quarter, possibly due to tax refunds received by some consumers.

So far, this deterioration in charge-off rates has not translated into any rating actions for the Canadian credit card sector.

But there could be negative rating consequences for credit card asset-backed securities if charge-off rates continue to rise, according to senior Moody's analyst Sumant Inamdar, the lead author of the report.

He noted that the number of personal bankruptcies in the second quarter shot up 41 per cent to 31,659 from 22,412 in the second quarter of 2008.

However, Inamdar noted there have also been recent positive trends in the economy and that while "the bad news will remain elevated . . . its not going to be getting significantly worse at a significantly faster pace," he said.

"That's the key to what's happening going forward. The pace of deterioration is slowing down."

Inamdar said another positive note was that Canadian credit card balances, while totalling $68.7 billion at the end of June, were up only slightly from $67.9 billion in January and up just six per cent from $64.9 billion in June 2008.

He compared that with a $4 billion increase to $58 billion from $54 billion in the same period in 2007, for example.

Campbell said that had a lot to do with Canadians having "peaked out" on their credit.

"Canadians have had record debt levels and the result has been that now the chickens have come home to roost so to speak," she said.

"They're tapped out. They can't get more credit. The banks are shutting off the stream of credit because their losses are so great, which is one of the reasons that debt load has not increased."